John’s Blog No. 108 – Pensions – Benefit and Welfare

Policy proposals indicate that we are rapidly approaching a situation where everything will be means tested, including State pensions, there is an overriding obsession or guilt with poverty, much of which is brought on by State policy and this needs to be brought back into perspective.

There is increasing envy of the rich and desire to take away benefits which they can afford themselves, but these are not the super rich who are affected, but the normal hard working prudent people, who pay their taxes and dues and manage their monetary affairs. They have paid for these services and benefits and are entitled to them.

Everything is now called benefit; originally tax allowances took account of the extra costs of raising a family, essential for creating the new working population we all depend on. These were abolished and replaced by child and other allowances paid for by the taxes and NI of those in work.

These in part led to the breakdown in marriage, leading to increasing State dependency, which blurred the boundary between earned benefit and welfare and has moved into old age, with State pensions becoming a welfare benefit  for all; paying more to those who make no provision at all.

They are now being made to pay twice, through taxes and NI and then expected to make their own personal and family provision including contributory pension payments, if they also save and own their own house, the State look on these assets as available to pay for future services, such as care.

Poverty exists and needs welfare, but should be kept in hand and at an existence level. The new single tier pension of £140 pw, £7,280 per year is presumably at this level, if all over the age of 65 were paid this amount, then the present total pensioner costs of £108bn, including welfare would reduce to £90bn per year, or give all the 10.5 million a pension of £10,000 per year.

In fact the full basic pension is much less at £110 per week, £5,600 pa and many exist on half of this, hence the poverty in old age, the whole system is a mess. We should sort out what is the minimum living income for adults and children, decide if this is the poverty level and apply it to all as the maximum welfare benefit.

The living wage being discussed is at this level for part time workers on 20 hours pw but twice this for full time, giving a minimum level of pension from NI contributions and a comfortable level from additional contributions, both of these should be provided in a universal earned contribution scheme independent of the State.

Part of NI contributions should be repayed or rebated as contributions to the new scheme at the same rate and combined with the newly introduced contributory scheme of 8%, which would be some 40% of NI contributions from the average wage.

Although it would be difficult, due to the existing pension liability, it is economically possible for the State over a 20 year transition period and the savings and benefits would be extremely large to both State and individuals, once these occur the refund could increase to 50% to cover lower paid wealth redistribution and elderly care.

Current pensioner costs take up the whole of NI income and are projected to increase considerably with population changes, stabilising these down to half the income by fully utilising the savings advantages of a funded scheme would allow NI to return to its original purpose, supporting the unemployed, job creation etc.

The State could even afford to keep up contributions for unemployed members and it would also be more economic to make contributions for the permanent welfare population, it is all a question of using the money wisely. 

John’s Blog No. 107 – Pensions – Delayed Retirement 2

If pension provision was managed properly, there would be no need to worry about when to retire, it would be a matter of personal choice and provision. If you wish to put a little more away and manage your affairs to retire at 55, you should be allowed to do so, if you want and are fit to continue to work until 70 or beyond, you should do so.

The dependence on State largesse, even though you may have earned it, is the only reason for a fixed retirement age and the abrupt cessation of work, the State should not be involved. Whether it is contributions through NI, the new compulsory scheme or privately, it is your money and should be put away in your name for your benefit.

The management or control by external bodies as group funds do not affect or conflict with this principle, even the State could and should have done it, but are incapable by their basic nature of doing so. They should therefore put it into more capable hands with adequate safeguards and controls.

When you retire is also dependent on how long you are likely to live once you do retire, it is a little like how long is a length of string and dependent on heredity factors, lifestyle, interests and what you do with your time. How long did your parents or grandparents live, is there enough time to do all you want to, for travel or hobbies, if so you will wonder how you found time to work and probably live long enough to do them all.

Life expectancy is derived from Life Tables which track 100,000 individuals from birth to age 100, taking into account deaths and mortality rates and is the time from a given age for the number to halve, that is an even chance of living that long. It is a theoretical value and does not necessarily reflect what is actually happening.

Population figures are obtained by Census counts every ten years, with estimated figures derived annually from births, deaths and recently migration information, they are a count of actual figures in that year and when things are changing slowly Life tables and population figures should agree.

However we are in a period of rapid change and increased longevity is mainly affecting the under 64 population, increasing the flow over the 65 threshold resulting in the major part of the growing population increases in the over 65’s. Mortality rates also increase rapidly after 65 by a factor ten at 85 and in 2010 deaths averaged 1 in 500 from 0 to 64  but 1 in 25 over 65.

This could change just as rapidly the other way if all the advances of the past years were thrown away in our present suicidal life styles of smoking (now reducing), drink and drugs, dangerous driving and now increasing obesity, where even under fives are affected.

Once we thought nothing of walking everywhere, to school, shops and parks, now it is nip in the car and get annoyed if you can’t park by the door, we are couch potatoes, watching TV; on the phone and computer; video games; but no real games or exercise and we munch continuously.

We are already straining our health and local services and all the indications are that this will reduce life expectancy unless pressure is relieved. For pensioners this could be done simply by extending pension provision to include elderly care, there is surplus available in contributions if managed properly.

There is an urgent need to get back to a sensible state of affairs, both by the individual and the State, this may in many ways be more insular in approach, but do we want to be an all grey society, where there is no incentive to do anything, or do we want to retain out individuality.

This will inevitably result in differences in living standards, but we need to clearly separate welfare from earned, if you contribute to Society you should be treated differently to those who don’t, whether they be immigrants, vagrants, criminals or those fallen on hard times. Of course this needs to be treated with compassion.

Welfare needs to be contained within fair, reasonable and affordable limits, with greater consideration given to the provider's needs and not just as an unlimited source of money and envy.  

John’s Blog No. 106 – Pensions – Delayed Retirement

The State is now well advanced in plans to delay retirement by increasing the eligible age for State pensions, becoming fully effective by 2020 and letters have been sent out to this effect, with forward proposals to raise this to age 70 or beyond and link it to the vague but increasing life expectancy figures.

The main reason given to justify the action is the mantra “live longer, work longer” repeated by all concerned, yet there is little evidence for this.  Population studies shows this is an imprecise value which does not reflect what is really  happening, actual population life expectancy at 65 is closer to 10 years and health data shows 8 years.

The policy appears based on economic grounds rather than social and common sense considerations, yet increasing retirement from age 65 to 66 gives a current one off annual saving of £3bn, small compared to total pensioner costs.

The larger more cynical effect arises from those who will never retire; the over 70 population is currently 7.4 million, which means that some  30% over 3 million will have no retirement at all, a current saving in real terms of £32bn increasing with population and the possible retirement age beyond 70.

The real saving occurs by denying retirement to almost a third of the over 65 population, which has not been aired, discussed or apparently considered, yet you have a three to one chance of being one of those losers.

However the majority have made substantial NI contributions for over 40 years, with no funds to pass on to relatives only a possible State promise to support their direct dependents, not legally confirmed. This is a similar promise made to young girls who at age 16 joined the scheme after 1970; that they could retire at 60, after paying for 40 years and have now been told it is 66. Is this a contributory Pension scheme or a game of chance?

This is all part of the distorted attitude to State pensions and NI and the failure to treat them as your money, personal savings / insurance against your future, not a kitty to pay all and sundry, whether they pay in or not, which favours the “nots”, like the rest of welfare.

Of course, if it was treated as a contributory pension scheme in a similar manner to private schemes, none of this could happen, the State would not let it for a start and would insist on adequate funds to meet pension liabilities. So how does it?; Parliament makes the laws and rules, which in our democracy are supposed to be fair, equitable and universal, so why can the Exchequer or Government ignore or change them?

The irony is that if State pensions were run in a true contributory manner, none of the problems would arise; if invested and allowed to grow the present large contribution amounts would meet all foreseeable pensioner needs with at least half the money to spare and give all the investment funds the UK needs for growth and prosperity.

The problem is that everyone is so busy running around plugging holes in leaking economic dykes, that they can’t see the wood for the trees or even think straight and sensibly.

We are living longer, but most of the impact has occurred in the under 65’s, where quite rightly the medical and social care has been concentrated. Even just thirty years ago, out of every 100 male births only 74 would reach retirement at age 65, now it is 85 , females are higher at 91 and this longevity penetration is moving closer to age 70.

However reaching 100 is still a one off event, so that the 85 will not survive the next 35 years, although most people do not like to think about it, 85% of the population die in this last short period; if you look at the population decline from age 65 it is very rapid and has hardly changed in the past 30 years or in projections for the next 20 to 40 years.

State and group pension costs and even annuities are determined by this decline and the associated annual costs. These show that out of every 100 reaching 65 only 47 survive to age 75 and 14 to age 85 and therefore differ greatly from the life expectancy results, which give an individual an even chance of living to 85.

The reason is that there has been no major medical breakthrough in anti- ageing drugs, the much sought after elixir of life has not been found and the appalling elderly care is only just receiving attention. It is unlikely that a cure for old age exists, the best one can do is keep physically and mentally active as long as possible and avoid extremes of cold and nutrition, eat well, keep warm and socialise!

What this all boils down to is that retirement is special but limited, needs to be enjoyed and sustained as long as possible and State restriction by delaying the start is not justified from the evidence available and should be resisted.

John’s Blog No. 105 – Pensions – Your Money 2

Therre were two events this week that emphasised the general failure to recognise that NI contributions are your money and should be treated as such and as a commons sense approach to present problems.

The Autumn statement was the expected non-event of doom and gloom, with little major effort to promote growth and the economy, some release for investment in infrastructure, pinched from other budgets, but nothing like the amounts available a bold approach to pensions would create.

State basic pension increases of 2.5%, although welcome do little to redress the balance of years of neglect or the fact that even the full pension is over £30 per week less than pension credit and nothing said about S2R, which rose last year but not previously.

The inflation rates for pensioners are much higher than the published rates, they buy few i-phones, computer games or fashion clothes, etc. and are hit harder by energy and food increases. The whole position needs to move away from welfare and charity hand outs separating true welfare from benefits earned by hard work and payment over many years of Taxes and National Insurance, to real entitlements.

More worrying was a report from the Institute of Fiscal Studies discussing a unified simplified tax system merging Income tax and National Insurance contributions as a single tax, paradoxically, they also refer to the Contributory State pension system, but fail to say how this would work.

Although this is the way the Exchequer is trying to move, it would throw away years of endeavour to establish a welfare state for those in work; at the time this was brought in our society was work based and centred, we had a strong sense of paying our way and earning our keep, now sadly missing in many elements of our Society.

National Insurance needs to return to just that; insurance and pension contributions for those in work related to the amount paid in with only essential minimum redistribution of wealth, your money intended for your use. If the State cannot manage such contributions in this manner, then it needs to be removed to somebody who can.

The amounts are large, for someone on the average wage of £500 pw, the combined NI amounts to 20% of wage; if unified it would give a basic tax rate of 40% rising to 60 and 70% plus VAT, fuel duty etc. etc.  etc. Again nobody has thought it through, imagine this as the mainstay of the next election manifesto, very popular in opposition.

Other autumn statement proposals hit those in work, limiting benefit rises to 1%, many of which were again part of original NI benefits, of course the wealthy had tax relief reduced on pension contributions, now £40,000 pa with £1.25 million maximum. At 6% return this would limit the pension to £750,000 per year, we should all be that lucky.

A more realistic level would be the 40% tax level, which with allowances starts at over £50,000, with average contributions at 20% of £10,000 pa, this would still give appreciable relief at 20% and a much fairer system. If you are on average wage you would only get half of this and the revenue savings could allow misery relief elsewhere.

 The whole of NI income raised is spent on Pensioners, currently £108bn, with a further additional £54bn on working age benefits; if transition to a fully funded pension scheme was made, expenditure could be contained within 50% of income in a more secure pension regime free of demographic and age dependency effects.

The resultant funds created would meet all the projected cost rises and release equivalent funds for investment in the UK, at levels not seen since the Industrial revolution, and secure our future growth and economic prosperity.

The £54bn released would meet the working age benefit bill, but should be targeted at those in work and ensuring work for those unfortunate unemployed, a labour waste we cannot afford!

That could fulfil my aims on pensions and work, but will only occur if the voting population demand it. Your money, your choice, your pension.

John’s Blog No. 104 – Pensions – Your Money

It is time that pension provision changed drastically, contributions are your money resulting from years of hard labour and the associated wages and Employers contributions and should work equally as hard for your future security and not for the benefit of anyone else.

Yet the Exchequer, pension providers and even Employers treat it as their money to use as they will, invest where they want or just to sit idle earning nothing, which occurs with many defined contribution schemes, where the money is at you risk but their pleasure.

The State is the worst offender, they collect substantial National Insurance contributions for your work insurance and retirement, put it in the State spending pot and spend it as they get it so that is not there when you want it. If and when you get a return, it is treated as benefit to be shared with all and sundry, join the queue.

It does not go forth and multiply, give any return or guarantee that it will be there when wanted, certainly in any adequate amount to reflect the contributions made. It becomes part of the social idealistic charity in which those who do not bother to work and contribute get most and are better off.

Even if you pay extra in a private scheme, which now all are being forced to do, you have no guarantees, your Employer may spend the money and default, the State will tax your investment returns, will raise a levy against default, due to their lack of financial control and your provider will make excessive charges.

This doom and gloom is not a good reason not to save but a need to demand more from those precious savings, it is essential that each individual puts away an adequate amount during his working life to support him in retirement, that they should be self sufficient.

Unless you wish to live in poverty, misery and uncertainty, you must not rely on the State but fend for yourself, that does not mean that existing National Insurance should remain unchanged, those in work who make these contributions need to insist they return to their original purpose.

They were intended as a national insurance for those in work and contributed, as a protection against potential hard times due to unemployment, ill health and a pension contribution for retirement, to reflect the money paid into the scheme.

Such savings for the future have not been put aside for future benefit, but have been spent as they arise, often used for other purposes or even squandered, with the intended benefits severely reduced, discarded or paid to non- contributors. Unemployment benefit is restricted to a poverty level payable to all , and pensions are almost at the same position, with the proposed single tier system abolishing the last remnant of State second pension.

If this money had been put aside, protected and made to work as hard as its contributors, we would not be in the present sorry state, put away as a proper insurance and pension fund, properly managed and invested it would be worth in real spending terms many times its original value, besides funding employment and growth.

It is not too late to change, in fact present and projected increases in the retired population make it imperative that we do. With this population due to double or more in the next 40 years, contributions will need to follow suit or the State pension will disappear altogether, the most likely outcome as those in work will be unable afford the cost.

All the pension reviews have ruled this out as impossible, but although difficult, it could be achieved with the will and determination to do so and the rewards would be large for both the State and the individual, however it is urgent, the longer the delay the higher the cost, until it will become impossible.

National Insurance contributions need to return to basics, removed from Treasury control to an independent body to be used for pensions, unemployment payments and job creation; half the present income would be needed to fund basic pensions, which would need supplementing with the new contributory scheme to give a “living wage” pension.

It is time for a change in pension provision, the contributions being made in State and private schemes, including N,I are more than adequate to meet all elderly needs of income and care, they just need managing properly.

John’s Blog No. 103 – Pensions – Annuities 2

Last week we were considering annuities, the need to shop around and consider the various options available, of course one needs to know how much income is going to be necessary to maintain the present standard of living. One can start by looking at your latest pay check and the final take home pay after deductions of tax, NI, pension contributions and any other amounts.

This is what you are living on at present, when you retire, you may pay tax at a lower level but nothing else, you should also be free of mortgage payments, travel and work costs and children’s expenses (hopefully). This results at around 40 to 50% of your gross wage and is the amount good pension provision aims for.

The aim should also be to clear all debt and mortgages before retirement, to give a clean position; one must also add on costs associated with the extra things promised for retirement; travel, short breaks, hobbies, sport and leisure activities, visits and meals out  and other well deserved indulgences. These may be short lived as by age 80 you may be less able or want to indulge in these, so living costs would then reduce.

Another area is the 25% tax free lump sum that can be taken from Fund value; your provider may ignore this and quote the annuity on the full fund, but this may not be in your best interest as you could possibly put the money to better use. Take the money, even if you buy an annuity with it you will get a better rate; use it to clear outstanding debt in the first place as the interest due will cost you more than you can earn.

Otherwise invest it,  someone who spent £13,000 on solar panels on his roof yielding some 2,200 Kwh of electricity and also FIT payments giving £900 to £1,000 per year (almost 8%), tax free, inflation linked and guaranteed for 25 years; the money goes into the electricity account to pay his dual fuel bills. It also adds to the house value.

If your pension falls short of your needs, you could be entitled to benefit, particularly Council Tax or Housing benefit, don’t be afraid to claim, you paid for it whilst at work and are entitled. If you own your house, then equity release is being pushed hard, recent interest rates charged have dropped to 5.5%, but this soon erodes the balance asset value and is not a good option.

A better option is to downsize, using the money released to drawdown from the invested fund, any savings could be used in a similar manner, just keep a minimum contingency amount in reserve; you can’t take it with you!

However the whole pension scenario leaves much to be desired and gives a poor return on contributions made, particularly from annuities, which are the main reason for the poor performance and high contributions of pension provision particularly in defined contribution schemes which are almost totally dependent on annuities, losing money in real terms. This is the major problem with the new contributory scheme just introduced.

Doubling the return on annuities or pension payments will halve the contributions needed for a given pension, if the fund grows at the modest rate of 4% then over 40 years it will be worth in real terms 60 times the annual contributions, if this only gives 3.5% then the overall yield is only 2.1 times contributions, losing money in real terms.

At this level to obtain a pension of £7,350 would need a Pension Fund of £210,000 requiring total contributions of £3,500 per year, a massive 14% of average wage, the new 8% contribution (£2080 pa) would only give £4,368 pa pension, a poor and inadequate return due entirely to annuity shortfalls.  

It is not necessary for pension schemes to effectively finish at retirement and fund continuity through work and retirement has a lot of advantages, particularly if combined with more stable investment. One gets the best o f all worlds, the advantages of annuities, the smoothing out of the ups and downs, the strength of large investment funds and low costs and charges, with asset transfers across the age distribution.

Such Super Trusts would have large inherent strength and could afford to invest in a secure and social manner in UK infrastructure and business; some Councils run schemes for investment in sound local businesses, which give returns of 6.5% and with a good mix could go down to 4% giving worthwhile returns.

There is little doubt that pension funds and annuities could perform better and reduce contributions or increase returns, allowing greater security and confidence in the retirement future.

John’s Blog No. 102 – Pensions – Annuities

Annuity values are now at their all time lowest value causing uncertainty, suffering and misery at retirement to the point of uselessness. Forty years of patient pension provision are wasted in the short time available to decide, they are now outdated and unreliable.

They suffer from the speculative nature of the present commercial markets, unsuitable for dependable long term savings. Based mainly on Government Bonds which should be stable, they have become increasingly susceptible to supply and demand and the “quantitive easing” buy back makes matters worse.

 They arose from the need for a guaranteed income from a given individual pension fund, which were secured by Insurance Companies who balanced up the risk of whether the money would last longer than you This risk was reduced by  combining individuals into groups in which one person’s death was to the gain of the survivors.

The funds still had value and earn their keep, hence the dependence on the stable return from Bonds, at one time in the 1980’s there gave returns as high as 16%, with a £100,000 fund yielding £16,000 per year income, now you can expect at best £3,500 (3.5%) for a joint life increasing with inflation, to £5,800 for a single person with no increase.

At 3.5% on a straight draw down earning nothing, tucked under the bed, the fund would last 29 years, nine years longer than female life expectancy, if it earned enough to keep pace with inflation, draw down could do the same. This illustrates the absurdity of annuities today, which in fact perform at half the level they could do and should yield at least a 6% inflation proofed pension on a modest 4% earning power.

Retirement is one of the big steps in life and deserves preparation, at least six months before the great day arrives you should start looking at the pension options and planning budgets and how you will manage. If you are in a Company or Public Sector scheme, your Employer should provide you full details, otherwise in a defined contribution scheme you will need details of Fund value and expected Annuity returns.

 One of the main problems with Private pension schemes is that the State, Revenue and even provider act as if the money belongs to them and they are allowing you to use it, not that it is your savings by right. As a result there are strict rules on what you can do, the short timescale to decide and at what age you can do it.

In general, you can retire from 55 with penalties in DB schemes; DC schemes are dependent on adequate Fund values, also Funds from AVC’s (additional Contributions) and surprisingly SERPS rebate are treated more easily, in fact you can retire on a SERPS fund at 55, whilst S2R is not until 65,66….

The various options for consideration are:-

Drawdown – the Revenue will allow this if the Fund is over £100,000, but they assess the amount annually, which can inccur charges, usually drawdown rate  is 6%. The big advantage is you still have the money and control it, decide on investments and pass it on in the event of early death. If you have other income, you can draw down what you need up to the limit, giving a safety net and possibly less tax liability. You lose the group mortality advantage.

Annuity – this is the general option, but becoming less cost effective. In exchange for your Pension Fund you are given a guaranteed income for life at an agreed rate, however because of large fluctuations, often in weeks, the outcome is uncertain after a lifetime of saving and when it is too late to correct it.

Like all insurance products e.g car and home it pays to shop around, particularly as it is a one off deal with no chance to change your mind. Your current provider will probably not give the best offer initially so it is important to check comparison web sites and get various quotes and don’t be afraid to ask for all options. These are:-

5 year Guarantee – payment is guaranteed for the first five years and usually reduces annuity by very little

Single or joint life – allows payment to continue for partner, usually at a reduced rate was 2/3rds now 50%

Level or increasing – rises to meet inflation was 5% now 3% although 2.5% is norm and average over recent years.

 Male or Female – life expectancy for female is some two years longer, hence the difference.

Joint life is based on female life expectancy, normally worthwhile but check cost, particularly if both have good pensions. The difference between level and inflation proofed is quite large, at 2.5% £1 now is worth 62p in 20 years time,  a single life pension at £5,800 would be worth some £3,600 in real terms, almost the inflation proofed value plus the extra money for 20 years, also the amount needed to live on at 85 is much less than the more active 65, so you could manage on the decreasing real term value, so check the quotation figures.

To be continued.

John’s Blog No. 101 – Pensions - Living Wage

This week the main political parties have been talking about a living wage, which appears to be a cynical move to reduce welfare costs by passing them onto the business community, but like everything else, it has not been thought  through to its logical conclusion.

Once set as the amount needed to live on, it should apply to all areas, particularly pensioners, who have been hardest hit by inflation rises not being applied in the past to the State pension, resulting in the erosion of this contributory pension to the poverty level or below.

In spite of all the information and statistics on living costs, no one has come out with or published tables on what is the basic income needed to survive for a single person, couple or children. It was once taken care of in tax allowances, which was overridden by welfare concern for equality.

A figure of £7.45 per hour is being suggested, which represents £149 per week for the average part timer on twenty hours and some £280 for a full time worker, giving £7,750 and £15,000 per year. Of course at the full time level, tax, NI and new pension payments will be due totalling £3,100, bringing nett wage down to £12,000 and the Employer would be liable for £1,750.

At the present minimum wage full time would give just under £10,000 income with some £900 deducted, so the biggest winner is the State with less benefit and more tax/NI income. If the living wage is at this level then logically it should be free of all deductions, resulting in a massive loss of State revenue, if tax and NI thresholds are set there.

Where would pensioners stand, are they not entitled to a living wage, which is being set at twice the new proposed single tier pension level, the whole thing is a nonsense, without thought, of course we need change to welfare, but it needs a sensible approach.

Statisticians divide the nation into five parts, fifth’s or quintiles, the upper highest level are immune to budget economics and taxation effects, if paid due to their high income, as are the lowest level, living on welfare. It is the three middle levels who carry the main burden; they are industrious and ambitious who meet their responsibilities and pay their dues to Society; the backbone taken for granted and exploited.

This needs recognition and a change in attitude; if they pay in, they are entitle to draw out in some form of relative proportion, whether it be in pensions, child allowance or any other form. The State apparently takes no account of this earned debt/ investment benefit; in fact it confuses welfare and earned benefit, all being classed as benefit without discrimination.

This has led to the current state of affairs where one is better off not working or meeting any responsibility to Society; there is a need for welfare but it has to be kept in perspective and be affordable; wealth redistribution has to be kept within limits.

One needs to separate out earned from welfare; if you have worked hard and fall on hard times you deserve better treatment than those who have not, we have lost those ways and ideals. There could be some form of paid National Social Service with job training for those who have no work but are able, which could ensure full employment.

There are some who will be unable or incapable of work, the full time carers, students, home makers and disabled who need support; this is the real welfare, not the indolent itinerants who have no intention of supporting themselves and feel we all owe them a living, This should include immigrants, foreign nationals and non residents.

The time for change is well overdue, we are not even scratching the surface; restricting benefit to the gross average wage is a good example, it should be at least half or less to make work worthwhile. We cannot afford idealistic principles, which are mainly one sided.

We need to get back a sense of fairness in Society and a return to the basics of Society and Social gathering itself; if you are in and contribute  you should benefit; if you put yourself outside by any anti-social behaviour including failure to work, you need to re-apply and earn the position. It is quite simple and logical and overrides human or any other individual rights, we have lost sight of the fundamentals.

John’s Blog No.100 – Pensions – Simple Arithmetic

A diversion this week; we are all scared of mathematics and as a result avoid using it wherever possible, even though it is an essential part of everyday living. This arises from the pedantic and rigorous way they are taught which is part of the mind training aspects of the subject.

There is however a lighter and simpler side to the subject of arithmetic in the world of estimates, approximations, rounding up and down, percentages and fractions and a certain quirkiness of the figures which make them easy to use and remember.

For example the ten percent rule for unit conversion; a metre is one yard or 36” + 10%; a kilogram is 2lbs +10%; 4 pints are 2 litres + 10%, all of which makes conversion simpler and mentally possible. So if something is priced in lbs, double it add 10% to get the kilogram price; 500ml less 10% is a pint; all one needs to remember is the 10% rule and whether you need to double or halve it.

Many items are sold by length, add 10% to the yard price to get the cost per metre, or take off 10% for cost per yard; the number 454 also crops up; 1lb is 454 grams; 1 gallon is 4.54 litres; a square metre is 10 sq feet, a cubic metre is 33 cu ft; 1” is roughly 2.5cm, so a foot is 30cm etc.

A 25kgm bag of potatoes weighs 55lbs, roughly a cwt; 1ml (cubic centimetre) weighs 1 gm, a litre of water weighs 1kgm or 1cubic metre weighs 1 tonne and many things have a similar density and can be assessed in the same way, e.g. potting compost and even sand and gravel, useful when lifting things.

Rough estimating is another example, particularly in mortgage and HP payments; a loan for so many years at an given interest is on average half the interest over the full term, so a loan of £80,000 for 20 years at 6% would have interest of £80,000 x 20 x 3/100 = £48,000 giving a total of £128,000 divided by 20 = £6,400 per year or £533 pm.

Rounding up and down is another good estimating tool and it is surprising how all the odd amount balance out; one only worries about the whole numbers (or 1,000’s/ millions) and can quickly total up a column of numbers, even mentally or check a bill. Don’t worry to be precise.

Stores tend to knock off the odd penny to make it look cheaper, round it up and you can keep a rough check of the total; £2.99 + £4.99 + £7.49 is 3+5+8 - 53p giving £14.47. In these hard pressed days it is useful to check your shopping bill as you go round, to decide whether you can afford the odd item.

Percentages and fractions are another area not to be afraid of; everyone gives discounts these days in sales, special offers or total amount spent; 50% off is half the price, a further discount comes off this reduced price i.e. 10% is only 5% off the original price. For percentages divide by 100 or convert to a rough fraction if you prefer.

Of course in this computer age we all tend to become lazy and rely on someone else; however I always check. Mistakes occur, in stores the computer price often changes before shelf end price or offers finish or even ignore them altogether. Insurance renewals often go up by large amounts, after they have persuaded you in; to avoid moving every year check and query and it is often reduced.

Increasingly it is buyers beware and it is useful to be able to estimate on the spot to check whether it is a good or fair deal, prices are often increased to be discounted; pack quantities are reduced for special offers and it pays to be able to check even roughly. I have often seen reduced items dearer than standard shelf ones!

Arithmetic can be simplified and figures are not something to be afraid of, they can be a challenge or a even a game and improve and lighten a shopping expedition, you just need to grasp the nettle.                                                  

John’s Blog No 99 – Pensions – State Pension

The State and Public Sector pension system will not survive the onslaught of the projected population increases, which will occur over the next twenty to forty years. those in work will not be able to afford the extra and unsustainable costs  that the present unfunded “pay as you go” scheme entails.

With the retired population projected to double over this period, the National Insurance contributions will also need to double just to maintain the already poverty level State pension, the alternative is not worth thinking about.

The main cause of this population increase is due to an increase in flow across the 65 threshold, which arises from increased longevity in the under 65 population; if they all have their own personal pension fund adequate for all their retirement needs, the problem disappears.

This requires a change to a fully funded pension scheme, which although difficult is not impossible if carried out over a 20 year transition period, even with existing financial restraints. The main problem is the existing State pension liability and the time taken to build up sufficient pension funds, normally 40 years.

The benefits and advantages are enormous, particularly if combined with the new compulsory contributory scheme in a universal defined benefit scheme; the State pension would be abolished to be replaced by pension contributions either directly from NI contributions or a NI rebate.

To achieve a basic pension of 140 pw in real terms, would require contributions of £2,000 per year over 40 years and Fund growth/ income of 4%. The present total NI contributions represent 20% of average wage, requiring an 8% rebate to meet this minimum funded scheme level, some 40% of State NI income.

Individually therefore the new contributory scheme contribution of 4% plus 1% tax rebate, 3% Employer and 8% NI rebate, would give a fourfold gain on pension savings and a potential pension income of twice the basic level, some £14,000 per year, which would make pension saving attractive and worthwhile.

The large contributions would not be lost from the economy, but could be invested in the UK in  infrastructure, business, housing, schools, hospitals or anything that would give a modest 4% return. If set up as an ongoing Fund through work and retirement, it would also not need to be repaid, just serviced.

The State could also see substantial gains, once the existing pension costs decline, with rebate linked to income at a 40 to 50% level, some £30 to £50bn would be released with freedom from any future liability.

The system would need to be set up outside State control within an independent Trust or mutual Pension Society in a well managed and accountable manner with group accountability. Pensions should be clearly linked to contributions made, with only limited wealth redistribution.

There is a tendency today to mix up welfare and earned benefits, the all grey society of the idealist dream and envy of those better off. If you work and save hard and are prudent, you should keep the results; you are entitled to take out what you put in or more if it grows and keep hard earned wages and savings.

Welfare and charity should be something completely separate, possibly a responsibility but not necessary a right and certainly not at the expense of someone else, we must also accept differentials but within moderation. Our present Society is strongly biased against the average population in work.

Existing pension liability is the biggest problem, the pension contributions have been taken and spent, leaving the debt behind to be met by current and future generations; it is a never ending circle that needs to be broken, but one that can be managed.

The same applies to the over 65 population expansion; increased life expectancy is not having the major impact projected; mortality rates and mortality are reducing, but mortality only accounts for 4% of the retired population, although some 83% of total mortality.

As a result there is a discrepancy between population decline and life expectancy; the total over 65 population for 2011declines to half its value in 9.5 years, whilst life expectancy is twice this. This means that at age 75 only 45% of those alive at 65 survive, which reduces to 23% by age 85.

At present there is no justification in delaying retirement based on increased life expectancy.    

John’s Blog No 97 – Pensions- Welfare Benefit 2

The population in work cannot afford the present level of State pension and welfare expenditure and future population increases, particularly over 65, will make these completely unsustainable. Present charges are:-

Weekly  £	200	300	400	500	600
Annual  £	10,400	15,600	20,800	26,000	31,200
Tax	460	1,500	2,540	3,580	4,620
Nat’l Insur	580	1,204	1,828	2,452	3,076
NEST  5%	520	780	1,040	1,300	1,560
NI Emp'yer	667	1,385	2,103	2,820	3,538
NEST  3%	312	468	624	780	936

Members and Employers in defined benefit schemes pay two to three times the contributions of NEST.

With NEST Employers total deductions at average wage are 28% and Employers cost is 14%; total NI is 20%.

This is a substantial direct drain on employment and individuals.

Recent published figures show the pension liability of the State at a massive £3.2 trillion, this is effectively the value of the NI pension Fund from member’s contributions and even if it gave a modest 4% return would result in an annual investment income of £128 bn, almost twice the current basic and State pension costs at £68bn.

Although not recognised as such, this level of debt shows the extent of the problem and questionable legality of State pension provision in the UK through an unfunded scheme. Yet the money is being collected from wages with the DWP keeping a database of members and their NI contributions and their pension eligibility.

The system is run as a compulsory contributory pension scheme, without the controls or membership protection that the State insist on with private schemes and in fact without the benefits or rights, as welfare pensions pay more. The mode of operation and accountancy practices of the Exchequer make the State an unsuitable Pension Manager or Provider; it is unable to cope with member’s savings, degrading into the present “pay as you go” chaos.

In fact the same charge could be levelled at many private Insurance providers, with members of defined contribution schemes losing money in real terms (DWP report). Yet the successful Company and other schemes are being driven into extinction by the State from taxation, pension levy and inflexible and excessive Fund liability demands requiring extra investment at a time of recession, which the State itself does not observe.

A similar position exists with the main Public Sector schemes with a liability of £1.8 trillion and is likely to occur with the new compulsory NEST scheme. The tragedy is that the State is the main UK Pension Provider and two thirds of the population in work are contribution or have paid into it for their retirement future.

That future is bleak, the second pension is being abolished to be replaced by a single pension of £140 pw, some 28% of average wage; the NEST scheme is projected to give a further 14.4%, a total of 42.4% av wage, some £217 pw. Yet at £500 pw (av. wage) total NI contributions are £101 pw  (20%); if half of this was allocated to pensions combined with 8% NEST at 18% in a well managed scheme with current 5% growth over 40 years would yield £400pw pension.

Even in Private schemes dependent on annuities, the return has dropped so low making them unstable and not worthwhile, which could also apply to NEST on the same defined contribution basis. 

The case and need for major changes in State and private pension provision is overwhelming, the solution would be transition to a universal fully funded defined benefit scheme, but is not quick or easy; pensions are long term and changes would be similar and major State transition could occur over twenty years.

However the advantages and benefits would be large, both to the State and the individual with pension cost related to income resulting in major expenditure savings and a scheme giving greater benefits, which are linked to total contributions made. These have been considered in previous blogs but dealt with again later.

John’s Blog No 98 – Pensions- Welfare Benefit 3

Last week my disabled son received a letter regarding benefit changes. The Gestapo could not have devised a letter better designed to create fear, anxiety and terror; a Psychologist would have had difficulty, but for DWP it was easy. A little humanity and common sense could have softened the bureaucratic message. The letter indicated a questionnaire, followed by a re-assessment; the last time there was a purge, he was subject to a cross examination, asked to walk up and down stairs and even stand on one leg on a table (will catch you if you fall). The local Supermarket also wet- nursed him through several weeks of general work, but did not take him on. There are some people who are incapable of work and should be recognised and registered as such and exempted from re-assessment, their GP’s, Consultants and various excellent charities know this and should be consulted and believed. Registered and known disabled should be given benefit for life similar to a pension. Benefit costs and fraud need to be drastically reduced, but the policy of guilty until found innocent and disbelief needs to change. Inability to work ranges from permanent to partial to temporary, all medically certifiable and subject to checks by or visits to GP’s. anyone outside these limits should be subject to assessment. Many charities say the simplified assessment will make many disabled people substantially worse off, this is a ridiculous state of affairs. Statistical information on living costs, household spend etc. is readily available to establish monetary needs and allow income continuity; anything less is penny pinching economy. The State appears to have a current policy of universally offloading costs to Local Councils, business, charities and individuals, expenditure which rightfully and traditionally belong to the State. This is wrong; they should face up to their responsibilities; sort out the economics/ budgets; decide what they can afford and implement it properly. Charities and individuals do tremendous work, saving the taxpayer millions but do not get the support or recognition they deserve. We need to decide on the type of Society we want and how we can afford it, the problems are universal for pension provision, education, health, housing etc. all are closely related. As a Nation we apparently cannot afford to educate our children, support those incapable of work or even look after our older generation, yet our taxes keep rising, whilst no-one appears capable of doing the basic sums on what we need or can afford, preferring to plod on day by day and from crisis to crisis, with massive waste. It is time a well thought out, co-ordinated and common sense policy was thrashed out, linking all parties concerned to establish and match the needs and resources of UK Society and the most effective and economic way of meeting the demands. Are we an advanced Nation or just a Third World “has been”?

John’s Blog No 96 – Pensions- Welfare Benefit

An increasing number of pensioners are becoming dependent on welfare, even the Government refers to State pensions as benefit, not an invested right from contributions made, mixed in with other benefits and the total cost for all pensioners exceeds the National Insurance income. If you retired twenty years ago, even with State pensions, you were relatively well off; if you also had a private pension you were laughing all the way to the Bank, with annuity rates at 16% your pension fund gave at least three times the income in real today’s cost terms. Over those years, the State pension has been steadily eroded by rising living costs, which have not been matched by pension increases up until last year. This was the first time that both the basic and second pension matched inflation at a high rate of 5.1%; it is likely to be the last, judging by the official reaction and the moves to use lower indices. It is now at the basic poverty level, in fact those who have not worked or saved are now better off, during both their working lives and retirement, than those who work contributing National Insurance, a nonsense state of affairs. The truth is that those in work cannot afford the cost of welfare and unfunded pensions and this is going to get worse with the retired population projected to double in the next 20 to 40 years. The system is unfair and unsustainable, without even the guarantee of a good return from NI contributions when you eventually retire. Welfare Benefit is a problem in all developed Countries, with the solution ranging from let them starve to over generous housing and payment benefits. The Victorians created workhouses, which were just that and to be avoided at all costs, whilst landowners created tied cottages and large Employers built villages complete with schools, shops and recreation for Employees to encourage work. Today conscience and the heart rule over the brain and common sense, we need to create a compromise between starvation and “better than work” situation. Present standards are based on what we expect when in work and fairly paid; good housing, ample food including the luxuries and all the musts of modern living, which Society cannot afford and also resented by those who do for those who do not contribute. Benefit should provide the most basic living, the minimum to survive, it should discriminate between those who worked diligently, paid taxes but have fallen on hard times, deserving good treatment and the new entrants which divide between young citizens and immigrants. Benefit should not be long term, replacing work but a short term expedient. Those incapable of work, like disabled or full time mothers should be treated differently on a longer term basis, as should students. Earned work insurance and pensions should be treated as a right and not a benefit, although the latter may be needed in borderline cases. There needs to be a clear distinction between these, which requires the National Insurance contributions to be separated from State accounts, i.e. the Exchequer, in an independent body or Trust, serving those that work, the borderline is fudged with increasing numbers being forced into benefit. Benefit should not be a right but a concession and the State should manage the economy to minimise the cost; not by short term and penny pinching economies, but by planned policies and budgets to ensure maximum use of assets, which includes labour. Any able bodied unemployment is a waste. To be continued in next blog.